Romney Avoids Taxes via Loophole Cutting Mormon Donations

Ppresidential candidate and former Massachusetts governor Mitt Romney, center, his wife Ann, right, and Sen. Robert Bennett attend the funeral of President Gordon B. Hinckley, leader of the Church of Jesus Christ of Latter-day Saints, February 2, 2008 in Salt Lake City. Source: Church of Jesus Christ of Latter-day Saints via Getty Images

Oct. 29 (Bloomberg) -- In 1997, Congress cracked down on a
popular tax shelter that allowed rich people to take advantage
of the exempt status of charities without actually giving away
much money.

Individuals who had already set up these vehicles were
allowed to keep them. That included Mitt Romney, then the chief
executive officer of Bain Capital, who had just established such
an arrangement in June 1996.

The charitable remainder unitrust, as it is known, is one
of several strategies Romney has adopted over his career to
reduce his tax bill. While Romney’s tax avoidance is legal and
common among high-net-worth individuals, it has become an issue
in the campaign. President Barack Obama attacked him in their
second debate for paying “lower tax rates than somebody who
makes a lot less.”

In this instance, Romney used the tax-exempt status of a
charity -- the Mormon Church, according to a 2007 filing -- to
defer taxes for more than 15 years. At the same time he is
benefiting, the trust will probably leave the church with less
than what current law requires, according to tax returns
obtained by Bloomberg this month through a Freedom of
Information Act request.

In general, charities don’t owe capital gains taxes when
they sell assets for a profit. Trusts like Romney’s permit
funders to benefit from that tax-free treatment, said Jonathan
Blattmachr, a trusts and estates lawyer who set up hundreds of
such vehicles in the 1990s.

Near Zero

“The main benefit from a charitable remainder trust is the
renting from your favorite charity of its exemption from
taxation,” Blattmachr said. Despite the name, giving a gift or
getting a charitable deduction “is just a throwaway,” he said.
“I used to structure them so the value dedicated to charity was
as close to zero as possible without being zero.”

When individuals fund a charitable remainder unitrust, or
“CRUT,” they defer capital gains taxes on any profit from the
sale of the assets, and receive a small upfront charitable
deduction and a stream of yearly cash payments. Like an
individual retirement account, the trust allows money to grow
tax deferred, while like an annuity it also pays Romney a steady
income. After the funder’s death, the trust’s remaining assets
go to a designated charity.

Romney’s CRUT, which is only a small part of the $250
million that Romney’s campaign cites as his net worth, has been
paying him 8 percent of its assets each year. As the Romneys
have received these payments, the money that will potentially be
left for charity has declined from at least $750,000 in 2001 to
$421,203 at the end of 2011.

Tax Returns

The Romney campaign declined to answer written questions
about the trust.

“The trust has operated in accordance with the law,”
Michele Davis, a campaign spokeswoman, said in an e-mail.

Paul Comstock, a financial adviser to LDS Philanthropies,
an arm of the Mormon Church, said that while he wasn’t familiar
with the trust, Romney and his trustee might arrange to
compensate the church for the dwindling amount with other gifts.

“It may be that they’ve made provisions for the charity
someplace else that will make up for what this isn’t going to
give them,” Comstock said.

Bloomberg News obtained the trust’s tax returns from 2007
to 2011 from the Internal Revenue Service. Romney hasn’t
disclosed the trust’s tax returns and is under no legal
obligation to do so. He did make some disclosures about the
trust’s investments in Massachusetts filings from 2002 to 2007
and as a presidential candidate in the current campaign.

After Death

Funds held by Romney’s trust are scheduled to be
distributed after the death of Romney and his wife to “a
charitable organization to be designated by Romney,” according
to the 2007 filing, disclosing assets he held while governor of
Massachusetts. “In the absence of such a designation the funds
will go to the Church of Jesus Christ of Latter-Day Saints.”

Davis declined to comment on whether Romney has designated
another charity since then.

Romney has been an active member of the church, which
expects members to donate 10 percent of their income. Over the
years, he has donated millions of dollars of stock in Bain-owned
companies to the church, securities filings show.

The church recommends such trusts on its website as one of
many options for donors.

“Probably one of the advantages of a charitable remainder
trust is that it helps with capital gains tax,” said Carl
McLelland, an attorney in the planned giving office for LDS
Philanthropies.

Capital Gains

CRUTs were more common in the 1990s when capital gains
rates were higher. In 1996, when Romney set up his trust in
Massachusetts, the federal rate was 28 percent, compared with 15
percent today. At the time, a Massachusetts state resident who
sold shares for a gain of $1 million could have faced a combined
state and federal capital gains tax of as much as 40 percent,
reducing his take to $600,000.

By contrast, if he contributed the stock to a CRUT, and it
sold the shares, it typically wouldn’t owe any tax since it is a
charitable trust. The CRUT could reinvest the $1 million and
earn a return on the full amount.

“The power of this is the tax deferral,” said Jay A.
Friedman, a partner at accounting firm Perelson Weiner LLP in
New York. “The money is all growing tax free and he only pays
tax on what is distributed to him.”

Concerned that CRUTS weren’t sufficiently philanthropic,
Congress mandated in July 1997 that the present value of what
was projected to be left for charity must equal at least 10
percent of the initial contribution. Existing CRUTS weren’t
affected by the new law.

Dwindling Principal

Romney’s trust was projected to leave to charity an amount
with a present value of a little less than 8 percent of the
initial contribution, according to an analysis by Friedman.
Thus, the specifics of Romney’s trust wouldn’t have passed legal
muster if it had been set up 13 months later, he said.

Because the trust’s investments have been earning a return
far below its annual payouts to the Romneys, its principal has
dwindled rapidly.

In 2001, five years after it was established, the trust had
a value of between $750,000 and $1.25 million. Since then, it
has pursued a conservative investment strategy -- regardless of
the ups and downs of the stock market -- buying a mix of money-market funds, federally-backed bonds and federal bond funds.
Since 2007, it has moved its assets entirely into cash. By 2011,
its investments earned a return of $48, down from between
$60,001 and $100,000 in 2001. It paid $36,696 to the Romneys in
2011.

Romneys Favored

The current investing strategy favors the Romneys over the
charity because they get a guaranteed payout, said Michael
Arlein, a trusts and estates lawyer at Patterson Belknap Webb &
Tyler LLP.

“The Romneys get theirs off the top and the charity gets
what’s left,” he said. “So by definition, if it’s not
performing as well, the charity gets harmed more.”

The trustee for Romney’s CRUT is R. Bradford Malt, chairman
of the law firm Ropes & Gray LLP, and manager for Romney’s
various family trusts as well as his personal attorney. Ropes &
Gray has also been for years the main outside counsel for Bain
Capital.

If the CRUT maintains the same investing strategy, assets
will continue to shrink, said Jerome M. Hesch, a tax and estate
planning attorney at the law firm Carlton Fields. The trustee
acted prudently in protecting against losses during a stock
market decline, he said.

Nevertheless, “what’s going to go to charity is probably
close to nothing,” Hesch said.